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Financial Literacy - College funding
Joe Hurley
Our College Money Guru tells you everything you need to know about college savings plans.
Smart ways to pay for college

Interview: Joe Hurley

Avoiding money mistakes

What are some of the common misunderstandings about 529 plans?

Understanding 529 plans
529 plans vs. other ways
Choosing the right 529 plan
Avoiding mistakes with 529 plans
Upcoming rule changes

One is that your choice of 529 plan in some way influences or determines where your child has to go to college. It doesn't make any difference with 529 savings plans.

Another misconception is that 529 plans are going to dramatically reduce your eligibility for financial aid. In fact, they're no worse than other types of investments and they're treated better than certain types of investments. If you put money in your child's name in a mutual fund, it counts heavily against financial aid eligibility. But if you put money in your child's name in a 529 plan and your child applies for aid as a dependent, it's not counted at all under current rules. If it's in your name as a parent, then it's going to be counted at a low rate in eligibility. A parent owning a 529 account is treated the same as a parent owning a mutual fund that's set aside for college. A 529 plan owned by the student is excluded entirely, whereas a mutual fund owned by the student is counted heavily.

Should the account be in the student's name?

That's a good question. Generally I say no, because the advantage to keeping it in the parent's name is that the parent always has control and ownership over the money and doesn't have to give it up when the student reaches age 18 or 21 years old. Because parents' money isn't counted heavily anyway, it's not hurting financial aid that much.

What mistakes do people make with 529 plans?

You can use any state's 529 and your child can go to any school.
One mistake is not recognizing the gift tax consequences if they're putting in large amounts. These contributions must be treated as gifts to the beneficiary, and you only have a $12,000 annual exclusion to cover all of your gifts, whether they're 529 contributions or gifts of cash or stock to a child. That's a limit on large contributions, but most families aren't making that size contributions each year so it's not really an issue.

The other mistake is people who don't understand their state tax benefit and the availability of a benefit when they're choosing the 529 plan. Some people will assume they will get that state tax deduction if they invest in any 529 plan, when most states require that you invest only in the in-state 529 plan to get that deduction.

-- Posted: Sept. 17, 2007
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